- GBP/JPY regained positive traction on Wednesday, but lacked follow-through buying.
- Uncertainty about the Bank of Japan's rate hike weakens the yen and provides some support to the cross.
- Geopolitical risks can help limit significant losses for the yen and limit further gains for the yen.
The GBP/JPY cross attracted bullish buying during Wednesday's Asian session, reversing some of the previous day's losses. However, the spot price remains below the technically important 200-day simple moving average (SMA) and is currently trading around the 191.00 mark, up less than 0.15% on the day.
The Japanese yen (JPY) continues to fall due to uncertainty over further interest rate hikes by the Bank of Japan (BOJ), which is seen as a key factor providing some support to the GBP/JPY cross. Indeed, Japan's new Prime Minister Shigeru Ishiba said earlier this week that the Bank of Japan's monetary policy must remain accommodative to support the fragile economic recovery. Additionally, Ishiba is seeking to secure a national mandate in a snap election on October 27, increasing political uncertainty and putting further pressure on the yen.
However, fears of an all-out war in the Middle East were further heightened after Iran fired more than 200 ballistic missiles toward Israel on Tuesday. This, in turn, will dampen investor appetite for riskier assets, as evidenced by the general weakness in global stock markets and further losses for the safe-haven Japanese yen. This should help suppress the Furthermore, the market is pricing in further interest rate hikes by the Bank of Japan by the end of this year. This represents a significant divergence compared to the Bank of England's (BoE) bet on further interest rate cuts and will limit the GBP/JPY cross.
With no relevant economic announcements to move the market on Wednesday, the aforementioned fundamental backdrop calls for caution before making new bullish bets on the currency pair. From a technical perspective, the 50-day SMA fell below the 200-day SMA last month, forming a “death cross” on the daily chart. Additionally, the GBP/JPY cross was repeatedly rejected above the 200-day SMA. Therefore, strong follow-through buying is required to support the outlook for further upside.
Bank of Japan Frequently Asked Questions
The Bank of Japan (BoJ) is Japan's central bank, which determines the country's monetary policy. Its mission is to issue paper money and exercise monetary and monetary control to ensure price stability, which means an inflation target of about 2%.
The Bank of Japan launched an ultra-easy monetary policy in 2013 to stimulate the economy and promote inflation in a low-inflation environment. The bank's policy is based on quantitative and qualitative easing (QQE), or printing money that provides liquidity by buying assets such as government bonds and corporate bonds. In 2016, the bank doubled down on its strategy, first introducing negative interest rates and then further easing policy by directly controlling the yield on 10-year Treasuries. In March 2024, the Bank of Japan raised interest rates, effectively retreating from its ultra-accommodative monetary policy stance.
The yen has weakened compared to major currencies due to the World Bank's large-scale economic stimulus package. This process is expected to worsen in 2022 and 2023 due to widening policy divergence between the Bank of Japan and other major central banks, which opted for significant rate hikes to combat the highest levels of inflation in decades. did. The Bank of Japan's policies have widened the gap between the yen and other currencies, and the value of the yen has fallen. This trend partially reversed in 2024, when the Bank of Japan decided to abandon its ultra-accommodative policy stance.
Japan's inflation rate has risen due to a weaker yen and soaring global energy prices, exceeding the Bank of Japan's 2% target. The prospect of domestic salary increases, a key driver of inflation, also contributed to the move.
